Municipal bonds may help finance smart cities

Written by Arup Roychoudhury | New Delhi | Updated: Aug 7 2014, 07:05am hrs
The government wants to give a fillip to the nascent municipal bonds market, identifying it as one of the ways to raise finances for infrastructure, including creation of 100 smart cities proposed in the FY15 budget.

We have options like PPP, infrastructure bonds, etc to mobilise funds for the proposed smart cities. Additionally, we are also looking at bolstering the municipal bond market, through which at least 10% of the funds needed can be raised, an official said.

Ahmedabad was the first Indian city to issue municipal bonds in 1998. Since then, 25 municipal bond issues have taken place in India, including taxable and tax-free bonds and pooled financing issues, mobilising funds to the tune of nearly $300 million, according a report by Prof Mukul Asher of National University of Singapore and Shahana Sheikh of the Centre for Policy Research, New Delhi.

The amount is just a fraction of the municipal bond market in the developed markets. For instance, in the US, this market is worth $50 billion.

While the contours for the smart city scheme are being worked out and a cabinet note will soon be prepared on this, government officials told FE that the Finance Ministry and Urban Development Ministry are discussing various options to raise funds to develop them. The idea is to develop these cities from existing mid-sized cities and satellite towns of larger cities to house the emerging neo-middle class aspiring better living standards. A sum of R7,060 crore was allocated for the scheme in the budget.

The last conventional municipal bond issue was by Nagpur Municipal Corporation in 2007 for R21.2 crore and the last pooled financing municipal bond issue (where the state government issues the bonds on behalf of urban local bodies), was by the Tamil Nadu Urban Development Fund in 2010 worth R83.1 crore. Both the issues were for water supply and sewerage infrastructure. According to Sheikh there municipal bonds have not picked up in India mainly because of a lack of interest amongst investors, the sorry state of finances of many urban local bodies (ULBs), shoddy accounting of the ULBs' books, bureaucratic hurdles and lack of interest at the centre and state level, regulation, and the issue of who will guarantee the bonds.

Although the plan to revive municipal bonds is a good move, there is a lot of work to be done. A bond issue will not be a one-stop solution. But at the same time, the financial transparency that such a market brings with it will be a big positive, Sheikh told FE.

Officials say that some of the problems remain and will require coordination with the states and municipal bodies to eliminate.

However, under JNNURM, municipal corporations have moved or are moving to an accural-based double entry accounting system. There is greater transparency in the ULBs' books and the finance are being put in order.